Obama Tax Hikes Offer No Guarantee Of Reduced Deficit

President Obama delivers remarks on the economy and his plan to avoid the fiscal cliff during a visit to Daimler Detroit Diesel in Redford, Mich., on... View Enlarged Image

If President Obama gets his way on tax hikes as part of a "fiscal cliff" deal, you'll hear lots of talk about how it'll cut the deficit by some very specific amount over the next decade. Don't believe a word of it.

If history is any guide, the tax hikes won't raise nearly as much revenue as projected, and any promised spending cuts will somehow fail to materialize, which means the deficit problem will be far from solved.

The first rule of thumb when it comes to tax hikes is they almost always produce less money than budget forecasters claim, either because taxpayers find ways to avoid them, or they drag down economic growth, or both.

After President George H.W. Bush signed an income tax hike into law in 1990, for example, the Congressional Budget Office projected individual income taxes would total $1.6 trillion over the next three years, and would average close to 9% of GDP. As it turned out, those tax hikes generated $135 billion less than expected, and income taxes were below 8% of GDP.

Budget Tricks

Likewise, in the two years after President Clinton's 1993 income tax hike, revenues came in $10 billion below forecast and were lower as a share of GDP than expected.

(Conversely, revenues were $356 billion higher than expected in the three years after the 1997 tax cuts Republicans forced Clinton to sign.)

Even Obama tacitly admits his tax hikes on the so-called rich will hurt economic growth — and therefore generate less-than-expected revenue — since he's also calling for a new round of stimulus spending to offset the damage.

In the past, tax hikes also have come with big promises of future spending cuts. That was the case after Presidents Reagan and Bush reluctantly agreed to boost revenues. But somehow, those spending cuts failed to materialize.

Worse, to the extent that the tax hikes generate more revenues, lawmakers will be sorely tempted to spend it, rather than use the extra money to cut the deficit. Obama himself has already promised to "invest" more than $200 billion next year alone, as part of his $1.6 trillion tax-hiking fiscal cliff plan.

The most egregious is the "baseline" budget, which assumes federal spending will continue to climb at a certain rate year after year. Any change from that baseline is called a "cut," even if actual spending levels continue to climb.

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